EU warns of contagion risk if Italy does not change budget plans

BRUSSELS (Reuters) - European Commission Vice President Jyrki Katainen urged Italy on Thursday to submit a draft budget in line with commitments and warned of risks for Italy and other euro zone states.

Italy’s eurosceptic government raised market concern when it announced two weeks ago a plan to raise its headline budget gap to 2.4 percent of gross domestic product in 2019 and flout fiscal targets agreed with euro zone peers.

“The situation is very fragile,” Katainen told reporters when asked about Italy’s budgetary plans and initially negative market reaction. He said no one wanted financial instability that could hit Italy and other euro zone countries “that may suffer from contagion risks”.

On Wednesday, the governor of the Bank of Greece said a drop in Greek bank shares was caused by external factors, as analysts blamed Italy’s row with the EU over its budget as the main cause of market pressure on Greek lenders.

Katainen, who is responsible for jobs and growth, said the Commission was trying to convince Italy to change its budget plans, which are likely to flout EU fiscal rules.

“Everybody has seen the situation in the markets, which is not positive,” he said, referring to reaction to the Italian plans. “Our interest is to get a result which is credible and try to convince the Italian government to take responsibility.”

All euro zone states have to submit their draft budgets for next year to Brussels by Oct. 15. The Commission could reject Italy’s plan if it is found in breach of fiscal rules.

“We do hope we can get good cooperation with the Italian government,” Katainen said.

He added: “It is not too late to maintain stability. It is not too late to make sure that growth can continue in Italy. It is not too late to show that public financing in Italy is on a credible path.”

Last week, the Commission sent a letter to the Italian government warning its budget plans were a reason for “serious concern” as they appeared to deviate significantly from agreed fiscal targets.